Year-End Tax Planning Tips
Trusts & Estates Law Update 12/03/09 Kristin A. Occhetti
While 2009 has been difficult economic year for many, you may be able to cut your 2009 tax burden with these year-end tax planning tips. Be mindful of both federal and state legislative changes when applying your traditional year-end tax planning techniques. It is not too late to take advantage of some tax-savings opportunities that may not be around next year.
1. Maximize your "above-the-line" deductions.
Many valuable tax benefits are unavailable to taxpayers who have a "high" adjusted gross income (AGI). "Above-the-line" deductions are deductions that reduce a taxpayer's AGI. A few of the more common above-the-line deductions include: contributions to a traditional Individual Retirement Account (IRA) or a Health Savings Account (HSA), moving expenses, self-employed health insurance costs, alimony payments and any bank penalties you may have incurred for early account withdrawals. As discussed in more detail below, if you purchase a new car in 2009, you may be able to deduct certain state and local taxes incurred on that purchase as an above-the-line deduction.
Maximizing your contributions to retirement accounts can result in significant tax savings because, aside from increasing retirement savings, those contributions made to traditional accounts, like IRAs and 401(k)s, reduce your taxes as well as your AGI. This may allow you to become eligible for certain deductions or credits for which you may not have otherwise qualified.
2. Maximize Retirement Plan Contributions.
Although you have until April 15, 2010 or your extension deadline next year to make IRA contributions for 2009, right now is a good time to determine if you can maximize 401(k) contributions to their regular and catch-up limits.
For tax year 2009, the regular contribution limit in a traditional 401(k) is $16,500 and $11,500 for a SIMPLE 401(k). For anyone who is age 50 or older in 2009, you can make an additional contribution of $5,500 for a traditional 401(k) and an additional $2,500 for a SIMPLE 401(k). Traditional IRA contributions are limited to $5,000 for those under age 50; for those over 50 during 2009, the contribution limit is $6,000. The deduction for traditional IRA contributions is an above-the-line deduction. Contributions to a 401(k) are excluded from your gross income altogether.
3. Contributions to Health Savings Accounts.
With health care reform pending in Congress, this may be the last chance to take advantage of a deductible contribution to your HSA. As with IRA contributions, you have until April 15, 2010 to make the contribution. It will be deductible on your 2009 return as an above-the-line deduction. The statutory maximum contribution for an individual with self-only coverage is $3,000, and the statutory maximum contribution for an individual with family coverage-a plan that covers the individual plus one other family member-is $5,950. Additionally, individuals age 55 and older are allowed an additional $1,000 contribution (if each spouse has his or her own HSA, each can contribute a catch-up contribution of $1,000 - joint HSA accounts are not permitted).
If you do not have a health savings account, you can deduct unreimbursed medical expenses over 7.5 percent of your adjusted gross income. If you are near the 7.5 percent mark or already over it, schedule non-emergency medical and dental visits before the end of the year.
4. Take Advantage of the IRA Charitable Donation Provision.
If you are 70½ or older, 2009 is the last scheduled year that you can direct your IRA trustee to make a tax-free direct transfer of up to $100,000 from your traditional or Roth IRA (only the taxable portion of a Roth IRA) to qualified charitable organizations or private foundations without recognizing federal income tax and without taking a charitable deduction. Contributions to donor-advised funds, supporting charitable organizations or charitable trusts are not eligible.
5. Charitable Giving.
Even if you are not eligible to or do not wish to take advantage of the IRA charitable donation provision, as a general rule, you may deduct the full amount of monetary donations made to qualified charitable organizations. If you use a credit card to pay for donations before January 1, 2010, you can deduct the full amount on your 2009 return even if you do not pay off the credit card charge until 2010. If you donate appreciated property held for more than a year, you can generally deduct the fair market value of the property. If you would like to donate depreciated property, you should sell the property and then give the proceeds to charity so that you can take the capital loss and the charitable deduction. Be aware that Congress recently tightened the substantiation rules; no deduction is allowed unless you maintain a record of the contribution, such as a bank statement or receipt from the charity. In addition, gifts of $250 or more must be substantiated by a contemporaneous written acknowledgement from the donee organization.
6. Harvest Tax Losses.
If you have depreciated investments in your taxable investment accounts, it may make sense to sell and offset them against any capital gains you have realized this year. In addition to offsetting the losses against gains, taxpayers may deduct up to $3,000 of these losses per year against ordinary income, with the excess carried forward for use in future years. The assets must be held in taxable accounts, as opposed to IRAs and other tax sheltered retirement plans. Note that you can minimize capital gains tax by holding stocks, mutual funds, or other assets for at least a year. The long-term capital gains rate of 15 percent applies to assets held longer than a year. Short-term capital gains are taxed at your ordinary income tax rate.
7. Determine AMT Liability.
Early this year, Congress "patched" the alternative minimum tax (AMT) by slightly increasing the exemption amounts to $46,700 for single filers, and $70,950 for joint filers. After 2009, the AMT patch will expire and exemption amounts will likely drop. Have your tax professional calculate your potential AMT liability for 2009. Depending on your situation, it may make sense to shift tax preference items to 2010 to avoid or reduce AMT liability this year.
8. Accelerate Other Deductible Expenses.
If you itemize and have outstanding medical bills, state and local taxes, mortgage payments or property taxes to pay, you may want to consider making those payments before year-end. Even if the expenses are not due until next year, any payments you make before December 31, 2009 are deductible on this year's tax return. If you use a credit card to pay for these expenses before January 1, 2010, you can deduct the full amount on your 2009 return even if you do not pay off the credit card charge until 2010.
9. Take Advantage of Economic Stimulus Laws.
The new economic stimulus law includes a special tax provision designed to generate sales of motor vehicles. It applies to qualified vehicles (passenger cars, light trucks, motorcycles and SUVs weighing no more than 8,500 gross pounds) purchased after February 16, 2009. If you purchase a vehicle before 2010, you may be able to deduct the sales and excise tax attributable to the first $49,500 of the purchase price. However, the deduction begins to phase out for joint filers whose modified AGI exceeds $250,000, and for single filers whose modified AGI exceeds $125,000.
Also, take advantage of the energy tax credit for installations in your home. The new economic stimulus law enhanced the residential energy credit for installations in 2009 and 2010. You are allowed a credit of 30 percent of the cost of certain high efficiency heating and air conditioning systems, qualifying water heaters, energy-efficient windows and doors, and qualifying insulation and roofs up to a maximum $1,500 credit.
You have undoubtedly heard about the 2009 first-time home buyer credit. There is also a similar and lesser-known credit for buyers who already own a home but purchase a new home. The credit is equal to the lesser of $6,500 or 10 percent of the purchase price of the home. The credit is a refundable credit; it not only reduces your income tax dollar-for-dollar, but also, if you do not owe $6,500 in taxes, allows you to claim a refund for the balance. This credit is capped, however, and is not available for those buying a home for more than $800,000. In addition, the credit is only available for single taxpayers with a modified AGI of $125,000, and married couples with a modified AGI of $225,000. Lastly, the credit only applies to "qualified buyers"-those taxpayers who have owned and lived in the same home for five of the eight years preceding the new home purchase-and the new home must become the buyer's principal residence.
10. Prepare for RMD to Start Up Again.
Required minimum distributions (RMD) from IRAs and other defined contribution plans were suspended in 2009, but will resume in 2010. Make sure you are prepared to start taking the appropriate distribution amounts as required, so you do not become subject to the heavy 50 percent excise tax.
11. Consider Gifting Strategies.
Although not an income tax tip, annual gifting is one way to reduce the value of your taxable estate for estate tax purposes. For 2009, the annual gift tax exclusion allows each donor to give up to $13,000 to an unlimited number of individuals without being subject to federal gift tax. Because the exclusion applies per donor, spouses can give combined gifts up to $26,000.
Congressional action on the current estate and gift tax rules could come prior to year-end. Should that occur, we will provide you with a further update.
This alert is intended as a general summary of legal matters and not as specific advice to any particular client. If you have any questions concerning the subject matter of this update, please contact Kristin Occhetti 414-277-3075 / [email protected] or your local Quarles & Brady attorney.